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So then it must just have been a storyline oversight, and elves did meet priests prior to Deismaar?

On a related note: If you need to be blooded to gain RP, and realm spells cost RP, and no one was blooded prior to Deismaar, then how were realm spells cast prior to that?

I think the simple answer is that they weren't, and rulers were also not "invested in the land" as they were after Deismaar. This probably means that they ruled less effectively, and, when the more effective method of being bound to the land became possible, unblooded rulers were gradually forced out of power.

As a side issue, note that it is perfectly possible to use the Birthright campaign rules in a historical seting, with very few modifications. You remove the rules for anything overtly magical (realm spells, sources, ley lines, etc.) but you really don't need to remove the bloodline and investment rules.

Instead, bloodline and investment just become a measure of your legitimacy, by whatever the local customs of the time would condier legitimate rulership. Thus, investment for a medieval French or English king would simply involve a (non-magical) ceremony conducted by a bishop. Bloodline would be a measure of his legitimacy: a great bloodline might indicate that he is the firstborn heir of the present king, a major bloodline would mean that he was not the crown prince, but a younger sibling, a minor bloodline would be the king's cousin or uncle, a tainted bloodin would be a bastard of any of the above. Bloodline strength would not provide any magical powers, but would convert into a reaction rll modifier for any major political situations, such as determining whether the counts, dukes and earls would support the ruler or the pretender in a civil war. Appropriate marriages and victory in battle might increase bloodline strength, foolish actions and bad luck (famine, plague, indiscretions coming to light, negative propaganda campaigns, etc.) might lessen it.

Avery simple way to do it is to simply redefine the non-human priests as a much less powerful variety of priest. This sort of idea is as old as D&D, as orcs, goblins etc. always had much weaker Shamen and Witch-Doctors rather than actual clerics.

So it isn't that they hadn't encountered divine magic - they just never encountered the sort of divine magic that the humans used. It is this full blown access that is referred to as "Priestly" magic, as the much less potent magic of the non-human clerical type was "Shamanistic" magic.

After the arrival of the humans, in time the non-human races figured out how to interact with their deities using the more powerful rituals that the humans used, and the old Shamanistic rituals were dropped and over the centuries have been long forgotten

If Moradin and Kartathok had been at Deismaar, then they did not sacrifice themselves as the other gods did, because if they had there would be bloodlines of those derivations. More likely they simply were not present. But this could be tweaked according to your own campaign.

The elves and dwarves historically never had a problem with each other- the dwarves stuck to the mountains the elves to the forest. So they never had conflict and thus the elves probably never encountered priestly magic.

As for goblin-kind, i'm guessing the power of Kartathok's priests / shamans never matched the power of the human priests. So while the elves may have encountered it, it wasn't with nearly the same intensity that the humans brought.